Friday, December 19, 2014

If you are feeling panicky due to some macroeconomic
headline or a temporary setback in one of your companies—stay away from your
brokerage account. Don’t even log in. If possible don’t even be on a computer
that day. At some point you will most likely regret panic selling your shares.

Monday, December 15, 2014

I always look for companies with long-term debt to equity ratios of 50% or less. Long-term debt creates interest which chokes out profitability and cash flow. Lower profitability growth can translate into lower stock price growth over the long-term.
Back to Stockdissector.com

Friday, December 12, 2014

Patience is a virtue in long-term investing. While it’s tested during volatile times it certainly pays over the long-term. If you start buying and selling at a whim then you rack up transaction costs and brokerage commissions that eat into your returns.

Tuesday, December 9, 2014

As of this writing, the stock market is declining. Long-term investors don’t panic but hold on to their shares and if they have the capital to commit and find companies that are truly cheaper, go in and buy more shares.

Monday, December 8, 2014

Dividend paying companies, the ones that pay out a prudent amount of their free cash flow in dividends, represent gifts that keep on giving. Reinvesting those dividends helps the compounding power over time. Companies that boosts their dividends regularly enhances that compounding power even more.

Sunday, December 7, 2014

Once you make the decision to invest in a company. Put it away and forget about it. There will be a lot of ups and downs but over the long-term a good business that sits behind high barriers to entry will add wealth to its shareholders.

Tuesday, December 2, 2014

Earnings Power is the ability of a company to generate and grow its earnings. High barriers to entry such as a distribution infrastructure, land infrastructure, and a unique product serve to improve this earnings power.

Monday, December 1, 2014

Talking about finding a gem—My wife and I was traveling the South Carolina countryside near the Georgia border when we discovered a used bookstore along the side of the road. While looking around, lo and behold in the furthest most difficult to reach corner of the store at the edge of the business section, sat an original copy of the third edition of Security Analysis written by investing legends Ben Graham and David Dodd with the help of utility analyst Charles Tatham, Jr. The book was published in 1951 and provides invaluable insights on how to analyze stocks and bonds, how to weigh them in the context of macro-economics, employing the margin of safety, buying stocks below intrinsic value and thinking rationally about publicly traded companies as a whole.

I gladly paid the $3 for the book feeling a little guilty about depriving someone else of invaluable knowledge. In the preface to the third edition I found this interesting paragraph that is reflective of the mood of the time but some of which can actually be applied to modern investment thinking:

“This preface is being written when the possibility of a third world war weighs heavily on all our minds. We need say only a word about this unhappy subject in relation to our present work. The effect of such a war upon ourselves and our institutions is incalculable. But in the field of security analysis we need consider only its bearing on the choice between various securities and between securities and (paper) money. It seems sufficient to observe that since war and inflation are inseparable, paper money and securities payable in specific amounts of paper money would seem to offer less financial or basic protection than soundly chosen common stocks, representing ownership of tangible, productive property.”

Here’s what I take away:

While a World War would mostly likely drive many companies into bankruptcies depriving investors of their rights to underlying assets it’s important for investors to think of a share of stock as a partial ownership of a business that produces free cash flow for the investor regardless of the denomination. Also, ownership of a business can mean potential profit regardless of the ruling government (as long as its business friendly) and currency denomination. This is how I interpret it.

Thursday, November 20, 2014

When buying shares of a company. Pretend that you are going to buy an ornate vase to be stuck on a mantle and forgotten about for decades. When the decades pass, you can open the vase and find gold on the inside.

Buying shares in a good publicly traded business that sits behind a wide moat and keeping it for a decade or more can do wonders for your wealth because you are not paying money in taxes and brokerage commissions.

Wednesday, November 19, 2014

One of the advantages of stock market gains is that they are untaxable until sold. Remember that when you consider selling a stock because of a bombastic macro-economic headline that won’t amount to anything in the long run.

Tuesday, November 18, 2014

Remember it always pays to save. You may plan for things but other unexpected events like medical emergencies, natural disasters, and permanent changes in your industry can disrupt your financial life.

Monday, November 17, 2014

Being a long-term investor means thinking of companies behind a stock as a business. It also means picking good businesses with wide moats and that have staying power. Moreover, you can take advantage of long-term capital gains tax free and without incurring brokerage fees.

Thursday, November 13, 2014

While you can prevent healthcare expenses by eating right and exercising daily, sometimes you just simply can’t control healthcare expenditures. Some diseases and conditions just happen. This represents another reason to save so that any unexpected expenditure can be covered.

Friday, November 7, 2014

When you trade your stocks on a day in and day out basis you subject yourself to the daily whims of the stock market which could go in any direction based on an infinite number of factors. By contrast, buying a share of an excellent business and holding it for the long-term will make you wealthy. If you want to day trade you would be just as well off as to go the dog track.

Thursday, November 6, 2014

Times interest earned is a very important and often overlooked measure. It is defined by the following formula--operating income/interest expense. It describes a company’s ability to cover interest expense incurred by long-term debt. I have said in many of my articles that the rule of safety lies at five times or more. Companies who can’t meet interest obligations may go into bankruptcy.

Friday, October 31, 2014

Being broke to me is a horrifying thought. That means you have no money to fix your car if it breaks down or buy gas causing you to lose your job. It also means you could not have money to pay for the doctor’s co-pay allowing you to figure out what is wrong with you. To me that is the ultimate Halloween horror.

Thursday, October 30, 2014

Sometimes a company’s stock price goes down without regards to that company’s fundamentals because the stock market as a whole is in a state of fear. This is a bargain. However, a company’s stock price can go down and stay down due to permanent company fundamental degradation. This is NOT a bargain. This is called a value trap.

Wednesday, October 29, 2014

In the stock market prices can go up and up and up. This can be really exciting especially when you own the stock that is doing the rising. Then..it crashes. Instead of panicking, long-term investors should be joyed and buy some more shares on the cheap.

Friday, October 24, 2014

Investing for the long-term represents your best bet in making money in the stock market. If you don’t trade for a long time you don’t pay commission and/or taxes on your gains. Sometimes it takes the courage to NOT hit the trade button during steep market corrections. It takes perseverance.

Tuesday, October 21, 2014

Buying dividend stocks can make a big difference in returns over the long-term. Stocks that continually boost dividends can also really add up. The S&P 500 Dividend Aristocrat list which is comprised of companies that boosted dividends for 25 consecutive years has given investors an annual return of 10.55% vs. 7.83% for the S&P 500 as a whole over the past ten years.

Monday, October 20, 2014

It’s important to continue thinking long-term both through thick and thin. When the markets corrects it’s imperative to hold onto your shares in good solid companies and to not take any losses. Eventually Mr. Market’s mood will improve and most likely those losses will disappear and turn into gains.

Wednesday, October 15, 2014

Investing legend Peter Lynch once said, "If you stay half-alert, you can pick the spectacular performers right from your place of business or out of the neighborhood shopping mall, and long before Wall Street discovers them."

Anyone can begin their investing research by looking at the stores and the products they sell. However, it’s just a start. It always pays to research the fundamentals such as revenue, cash flow generation, and the balance sheet.

Tuesday, October 14, 2014

Investing legend Peter Lynch once said, "Absent a lot of surprises, stocks are relatively predictable over twenty years. As to whether they're going to be higher or lower in two to three years, you might as well flip a coin to decide."

Monday, October 13, 2014

Investing legend Warren Buffett once said, "If, when making a stock investment, you're not considering holding it at least ten years, don't waste more than ten minutes considering it." Owning a share of stock means you own a share of a business and should entail the same long-term commitment.

Wednesday, October 8, 2014

Buying
a new car for say $25,000 is fine and dandy when you bring it home. The
neighbors are impressed and they look at you with jealousy and envy of your new
toy. However, if you buy a car for $15,000 you save $10,000. First, a person
may be more apt to pay cash for a car that is just $15,000 saving interest cost
on a loan. Also, if you are person who can pay cash for the $25,000 then the
$10,000 can add up over time. If you take that $10,000 and invest it in an
index fund that earns 8% per annum for the next 30 years that $10,000 becomes
$100,626.57 (see calculations below).

Tuesday, October 7, 2014

Dictionary.com defines the word contentment as “the state of being contented; satisfaction; ease of mind." Being satisfied with what you have is a key to lowering greed and the desire to keep up with the Jones which causes you to spend money unnecessarily. It makes it easier to spend less. Spending less than you earn is the key to saving and building wealth.

Tuesday, September 30, 2014

When people start to make more money they want to spend more. When you resist the temptation to spend more when moving into a higher paying job, it can change your life in unimaginable ways. It's akin to winning the lottery.

Monday, September 29, 2014

While money can't buy happiness it sure can buy options. This includes a cash cushion to get through a layoff or capital to take advantage of stock market corrections. Not being able to take advantage of buying a great company at a low price is like someone wanting that fancy watch or toy that is on sale but still not having enough money to buy it.

Friday, September 26, 2014

One of the ways I developed to save money is to add up your bills for the year and divide it by the number of paychecks you get in a year. If you get paid every other week divide your total expenses by 26. If you get paid twice a month you divide total expenses by 24. If you get paid once a month you divide total expenses by 12.

It gets a little more complicated if you work for yourself but developing financial statements will help even in this situation. If your expenses exceed your paycheck, you may want to either work more or cut back on expenses because you are burning through your savings or going in debt. If your expenses are less than your paycheck you are saving money.

Thursday, September 25, 2014

"Vote <Insert your party here> and remain poor" is the dumbest thing I have ever heard. As long as we remain a capitalist society, its up to you as the individual to garner success. Waiting for a politician to do it for you is a recipe for poverty.

Wednesday, September 24, 2014

I would very much recommend this Forbes blog that talks about the financial and business wisdom of Benjamin Franklin. Benjamin Franklin talks about the importance of staying out of debt and acquiring valuable skills as evidenced by his quote, “There’s more old drunkards than old doctors". The blog also goes on to talk about misnomers. For example the authors point out that Ben Franklin never said "A Penny Saved is a Penny Earned" but rather said "A Penny Saved is a Penny Got" in the preface to his 1758 almanac.

In the honor of the phrase "A Penny Saved is A Penny Got" let's see what a penny will get you compounded at various interest rates over a period of 30 years:

10%--Historical return of the stock market--.01 x (1.10^30) = $0.17

22%--Fantasy super investor return--.01 x (1.22^30) = $3.90

Now imagine savings dollars, tens of dollars, and hundreds of dollars.

Tuesday, September 23, 2014

The stock market provides the individual with the ability to buy and sell shares of publicly traded companies with very little start up capital. A large number of people stands ready at any given moment to sell you their shares of a company that could make you wealthy over the long-term. Conversely a large number of individuals stand ready to buy your shares in a company providing you with the opportunity to convert your shares to cash to use as you see fit--hopefully to retire or fund a child's education. The stock market serves as the best bet for the average individual to accumulate wealth.

If you are looking for companies that will provide an income
during retirement AND consistently give you raises then look no further than
the S&P 500 dividend aristocrat list. The dividend aristocrat list
represents an elite listing of companies that have consistently raised
dividends for at least 25 years. Companies on the dividend aristocrat list have
given an annualized return of 10.6% vs. 8.2% for the S&P 500 over the
last 10 years.

However, from a business owner standpoint I offer the
following criteria to help you focus on companies with staying power and a
better chance to continue those dividend increases over the long-term.

2 2.) Dividend sustainability—Look for businesses that
consistently pay out a relatively low portion of yearly free cash flow in
dividends for at least five years and preferably at a rate less than 50%.
Measuring dividend payouts against actual cash flow generation represents the
most accurate method of gauging dividend sustainability. You want companies to
retain some of that cash for other things such as reinvestment back into the
business, difficult times, and other forms of capital return such as share
buybacks.

3 3.) Decent dividend yield—Focus on companies that
provide an annual dividend yield of 1.71%
or greater, which is more than most online five year CDs according to
Bankrate.com. What’s the point of assuming the risk of buying stocks for income
if you can get an income stream risk free? Investors need extra yield to
compensate for the added risk.

Snacks and beverages

PepsiCo (NYSE: PEP) sells
things like snacks, hot cereal, oatmeal, bottled water, juices and carbonated
soda. Some of these types of products don’t exactly represent needed products
and actually fall under the wanted category. However, the company’s ubiquity and
global availability of products make it really easy to pick up one of its
products like soda and/or snacks on the go. PepsiCo holds
the No. 6 spot in the world in terms of beverage market share according to
Bloomberg Industry Leaderboard. This company represents one of the global
oligarchs in providing beverages and edibles.

PepsiCo’s dividend sustainability
lies in the OK range with its dividend to free cash flow ratio hovering between
50% and 59% over the past five years (see table below). However, its product
diversity and market dominance counterbalance this slight negative.

Currently, PepsiCo pays its
shareholders $2.62 per share per year and provides a nice yield of 2.9% which
just represents a starting point. PepsiCo’s market dominance and ubiquity will
most likely ensure PepsiCo’s continued revenue and free cash flow growth and
subsequent dividend growth.

Parts and supplies

Genuine Parts Service (NYSE: GPC)
sells
car parts, industrial parts, and office supplies which serve an essential
function in society. People need to drive or ride a bus and both things need
parts. Also, factories and mines need parts and Genuine Parts Service provides for
that as well through its industrial division. In addition, people can’t
function without office equipment.

Genuine Parts Service maintained
a pretty sustainable dividend rate over the past five year, keeping its
dividend to free cash flow payout ratio below 45% with the exception of 2011.

Genuine Parts Service Dividend to Free Cash Flow Ratio

2009

2010

2011

2012

2013

36.1%

43.5%

53.0%

37.0%

35.0%

Source: Morningstar and author’s
calculation

Genuine Parts Service currently
pays its shareholders $2.30 per share per year and yields 2.8%. People are
keeping their cars longer which mean that the need for car parts will be
sustained.

Spices and condiments

McCormick (NYSE: MKC) sells
things like condiments, spices, gravy mixes, and other things mixed in or on
top of foods. McCormick’s products definitely fall under the needed category.
People need its products to add flavoring and texture. The company isn’t
without competitors, but it is a market leader.

McCormick has paid out a
reasonable amount of its free cash flow in dividends with the exception of 2011
(see table below).

McCormick Dividend to Free Cash Flow

2009

2010

2011

2012

2013

37.5%

46.3%

60.9%

47.8%

49.3%

Source: Morningstar and author’s
calculations

Currently, McCormick pays its
shareholders $1.48 per share per year and yields 2.2% annually. McCormick isn’t
a high flying growth company but it isn’t going anywhere anytime soon.

The takeaway

The fact that these companies
sell highly desirable and needed products will ensure enough revenue and free
cash flow growth to serve as a solid basis for future dividend growth.
Investors will also reap gains in the form of capital gains as the market
adjusts the stock price to bring dividend yields to normalcy. They represent publicly
traded businesses to own for the decades.

Stockdissector is NOT an investment adviser. He owns shares in PepsiCo and will not execute trades in company shares for a period of three market days.

Friday, September 19, 2014

I really love sodas. But sodas can get expensive over time. At a local sit down restaurant sodas cost $2.25. It's kind of habitual for me. Let's say that I eat out 200 times per year: 200 x $2.25 = $450 per year. Let's say next year I refrain from that habit and the following year I save $450. I invest that $450 lump sum in an index fund and it gets 10% per annum for the next 30 years. Compound interest is a multiplicative mathematical function (1.10^30=17.45). Take $450 x 17.45 = $7,852.33. That's assuming I do this for one year only and assuming sodas don't go up in price. Imagine if I did this for now on?

Wednesday, September 17, 2014

My high school economics teacher illustrated the definition of capital with a cake. She said she spent $5 for the cake and asked if it is spending or capital. I said spending. Well she said it depends. If I am going to eat the cake its spending. If I am going to slice it up and resell the pieces then its capital. Its the best illustration on the definition of capital I have heard to date.

Tuesday, September 16, 2014

When investing in the stock market it always pays to think like a long-term business owner because superior long-term revenue and free cash flow growth leads to superior share price returns. You may as well go to the dog track if you are going to play the daily ups and downs of the stock market.

Saturday, September 13, 2014

It's important for long-term investors to develop a guide for doing their investment research. Over the years I have developed questions to guide me in my thinking when researching the publicly traded universe. With that said let's apply this process to Sprouts Farmers Market (NASDAQ: SFM).

1.) What does the company do?

When you buy shares in a company you effectively become part owner of that company. Therefore, it's important for an investor to understand what a company sells.

Investors should also look for companies that grow revenue and free cash flow over the long-term and retain some of that cash for reinvestment back into the business and for economic hard times. Excellent revenue and free cash flow growth serve as catalysts for superior long-term gains.

Sprouts Farmers Market's fundamentals since Jan. 2011 are excellent. Revenue, net income, and free cash flow increased 372%, 956%, and 1,320% respectively according to Y Charts. However, Sprouts Farmers Market's total return declined 24% vs. a 19% increase in the S&P 500 since the company's Initial Public Offering in August 2013 according to Y Charts, with the declining price due in part to subsequent sales of large blocks of stock by major shareholders.

Acquisitions, store expansion and same store sales increases contributed to revenue and net income expansion over the past five years. However, impairment costs stemming from store closures served as a drag against this growth. Net income growth filtered down to free cash flow growth exceeding capital expenditures growth, which is exceptional.

Sprouts Farmer Market continues to do well in 2014. Year-to-date revenue, net income, and free cash flow increased 23%, 109%, and 78% respectively. Same store sales and store expansion contributed to across the board growth. The healthy and trendy appeal of the company serves as a draw to consumers.

Sprouts Farmers Market also sits on a good balance sheet. Cash and long-term debt to equity ratios came in at 30% and 49% respectively in the most recent quarter. Long-term debt creates interest which chokes out profitability and cash flow. Investors should always look for companies with long-term debt to equity ratios of 50% or less.

3.) How much management-employee ownership is there?

Investors should also look for businesses where the managers and/or employees own a lot of stock in the company. Managers with a great deal of stock in the company will take better care to maximize company profits which will enhance share price and their personal wealth along with the wealth of shareholders.

Directors and officers collectively own 3.8% of this company. Douglas Sanders, Sprouts Farmers Market's President and Chief Executive Officer, owns 1.4% of the company's stock giving him extra incentive to maximize company profit.

4.) How does its "Report of Independent Registered Public Accounting Firm" stack up?

Every year a company employs external auditors to audit financial statements and evaluate whether it maintains adequate financial controls. At the conclusion of the audit, you want to see a letter from auditors with the language "unqualified" or "fairly presents" which generally means that the financial statements and internal systems in constructing them were clean or adequate. If you see "qualified" or "adverse" in the auditing letter's language then deeper issues in a company's financial statements may exist.

Last year, external auditors gave the company's financial statements a "presents fairly" opinion meaning that it's clean based on the audit. They provided no opinion on internal financial controls. However, management indicated some issues with internal controls pertaining to the "costing of non-perishable inventories" in 2013.

5.) What types of risk does it have?

It's always important for investors to weigh the various risks such as exposure to political risk in parts of the world where war is the norm, competitive positioning, and market price risk. Sprouts Farmers Market operates solely in the United States which means political risk resides in the relatively low range.

Even after the stock price decline, Sprouts Farmers Market still trades at a high P/E ratio of 54 vs. 19 for the S&P 500 and 25 for Whole Foods Market. This means that the company's market price risk resides in the stratosphere. It's a little better on a forward basis with Sprouts Farmers Market trading at a forward P/E ratio of 37 versus 18 for the S&P 500.

6.) What does its forward analysis look like?

Look for Sprouts Farmers Market's organic food to serve as a magnet for consumers. The company's robust fundamental growth definitely warrants a second look. However, investors need to heed caution over its internal controls issues and its sky high P/E ratio. The first time the company disappoints Wall Street its stock price will retract further.

Stockdissector is NOT an investment advisor and he owns shares in Whole Foods Market and will not execute any trades in the company for 3 market days.

Friday, September 12, 2014

Investing legend Warren Buffett had this to say when thinking about stocks:

"Shares are not mere pieces of paper. They represent part ownership of a business. So, when contemplating an investment, think like a prospective owner."When people think about buying stocks they should think in terms of strategic advantages and barriers against potential competitors on the business level and how much they are willing to pay to own such an enterprise. The cheaper the better.

Tuesday, September 9, 2014

Remember not all money is created equal. Some money should be earmarked for things like bills, unforeseen emergencies, and retirement. Everyone is on their own. It takes self discipline to do this. The best way to earmark is to prepare a budget.

Monday, September 8, 2014

Investing legend Peter Lynch ran the Fidelity Magellan Fund from 1977 to 1990 and earned 29% "annual average return" during that time. He had this to say on doing your due diligence before investing:

"Investing without research is like playing stud poker and never looking at the cards."
Investing without doing your research is basically a random shot in the dark and is not much better than gambling.

Friday, September 5, 2014

Here's an incentive to save and invest: Imagine accumulating $3 million dollars and investing that amount in various income producing assets such as dividend stocks yielding 2%. The amount of income generated would equate to $60,000 per year. You would never have to touch your invested amount.

Thursday, September 4, 2014

Net income is the amount of accounting profit a company has left over after incurring expenses. It is defined by the formula Revenue - Expenses = Net Income. Note this is not necessarily the amount of cash a company generates.

Tuesday, September 2, 2014

Gross profit can be defined by the following formula: Sales-Cost of Goods Sold = Gross Profit. Gross profit is the amount of money a company has left over after selling what it has purchased for inventory. Gross profit can also be misleadingly called gross margin.

Friday, August 29, 2014

Share buybacks or share repurchases only provide a theoretical return on value. It's better for a company to return the cash to shareholders directly or reinvest back into the company. Even if the share price temporarily moves in your favor because of it, the stock market could reverse course and wipe out the gains.

Thursday, August 28, 2014

When you see a company with a frothy dividend yield of say 4% you may want to check out its dividend sustainability. The best way do that is to see how much of its free cash flow a company pays out in dividends in a given full year. That way it won't get distorted by seasonal fluctuations. I consider a dividend sustainable if it pays out less than 50% of its free cash flow a year.

Wednesday, August 27, 2014

The rule of thumb in the past is to always have enough cash on hand to live on for six months. I would say in this day and age of economic volatility for your average Joe is to have enough cash on to live on for 1-2 years. Moreover, cash (over and beyond your emergency fund of course) allows you the opportunity to take advantage of lower stock prices when corrections.

Also when researching a publicly traded business its always preferable to find a company with a cash to stockholder's equity of at least 20%. Companies that store a lot of cash can get itself through a downturn.

Monday, August 25, 2014

Return On Equity is defined by the following formula: Return On Equity = (Net Income/Stockholder's Equity) x 100. It is a measure of how much profit can come from a company's capital base. Generally most companies that make good investments possess return on equity of 12% or greater.

Friday, August 22, 2014

When investing in the stock market it always pays to think long-term. Stock prices move up and down every day. However, if you think like a business owner and invest in a company that sits behind high barriers to entry against competitors resulting in excellent free cash flow growth over the long-term then superior long-term stock price appreciation will follow suit.

Wednesday, August 20, 2014

This represents a better measure of a company's profitability as it strips away accounting accruals leaving behind actual cash flow generated less the investments back into the business. A particular company may not represent a good investment if it utilizes all of its cash in capital maintenance.

Tuesday, August 19, 2014

The price to earnings ratio, also known as the P/E ratio, represents the most commonly quoted valuation measure in the stock market. It's basically defined by the following formula: P/E= Market price per share/earnings per share. The quoted P/E ratio can vary slightly from one publication to another as some uses estimated earnings, trailing twelve month earnings, last year's earnings, etc, in the denominator. Some publications quote the P/E ratio of the S&P 500. If the P/E ratio of your company exceeds the P/E ratio of the S&P 500 then it may be considered overvalued by some.

Wednesday, August 13, 2014

When you buy a share of
stock you become part owner of a business. Before doing that you need to
assess its fundamentals such as what the company sells as well as its revenue, profitability,
and cash flow growth rates. It's also important to assess how much of that
revenue the company keeps (margins). Moreover, you should also determine
whether the company retains some of that cash for reinvestment in the business.
Growth in revenue and cash flow generating capability while utilizing as little
external capital as possible is what determines superior long-term gains versus
the overall market.

It also pays an investor
if that company sits behind a huge barrier to entry against competitors.
Competitors dilute the profitability of your company while lowering the
potential for superior long-term gains.

Tuesday, August 12, 2014

Spend less than you earn and then invest and save the rest. It's as simple as that. Put part of it in a savings account for medical emergencies, job loss, and miscellaneous unexpected bills. Invest the rest in a financial instrument suited to your needs.